Metal Bulletin(LSE: MTLB) published its annual results today. Like most other media businesses, the Qualiport watch list member reported a rather flat 2001 performance. The past year was mainly characterised by two acquisitions which appear a very good strategic fit. All in all, Metal Bulletin remains an attractive business. But there's no value in the shares at present.

The business

To recap, Metal Bulletin describes itself as an "owner of valuable intellectual property and the provider of must-have information to niche business marketplaces". Those business marketplaces are metals, textiles, financial products, minerals, energy and shipping. The information comes in a variety of formats (e.g. journals, directories and statistical analyses) and via a variety of media (e.g. hard copy, CD-ROM and Internet). The subject matter contained in Metal Bulletin's news publications also includes specialist industry reports and the all-important pricing of various commodities. In general, Metal Bulletin's specialist titles are the equivalent of the Financial Times to the ordinary UK stock market investor.

In February 2001, Metal Bulletin purchased BCA Publications, a private Canadian business for £32.3m. BCA owns a handful of leading North American finance journals, including Bank Credit Analyst, Fixed Income Analyst and Emerging Market Strategist. During May 2001, Metal Bulletin paid £7.6m for three titles from Reed(LSE: REED), the major one being American Metal Market. AMM is considered to be Metal Bulletin's main competitor in the metals industry. While AMM is deemed a 'Bible' to its North American readers, Metal Bulletin's eponymously-titled journal is the European and Asian equivalent.

Both acquisitions have created the prospect of cross selling opportunities and production synergies plus, in AMM's case, the removal of a major rival. Furthermore, the purchases of BCA and AMM have seen the generally more reliable reader subscription become 45% (compared to 29% in 2000) of total group revenues.

Metal Bulletin's performance during 2001 was buoyed by the acquisitions. While total revenues improved 26% to £45.9m, BCA and AMM contributed an additional £11.1m. Underlying revenues, therefore, fell 4% to £34.8m. "Difficult" trading conditions were blamed. Downturns in various financial and commodity markets, plus the deterioration in advertising rates and exhibition attendances, all took their toll. Although operating margins declined from 2000's 21.1% mark, they remain a relatively healthy 19.1%. It's worth noting that the two acquisitions combined to register a 25% operating margin during the period.

Encompassing a £2.9m disposal gain, a £4.4m investment write-off and a £1.7m restructure charge, 2001 also saw the first set of exceptional items to grace Metal Bulletin's accounts for many a year. Net debt, however, remains a very comfortable £12.2m.

Apart from 1998, recent years have seen relatively little requirement for working capital. Furthermore, Metal Bulletin is one of those rare corporate gems where the annual depreciation charge rarely exceeds net capital expenditure. Indeed, while turnover has tripled to £46m since 1993, the level of fixed assets employed has increased from £2.7m to just £3.4m over the same time.

But a lack of working capital and fixed assets hasn't translated into an exceptional return on equity performance.

Between 1996 and 2001, Metal Bulletin's earnings jumped from £3.4m to £6.3m as the company's equity base (adjusted for goodwill and exceptional items) increased from £8.0 to £24.2m. The resulting incremental return on equity figure thus comes to 14.0% ((£6.3m-£3.4m) / (£24.2m-£8.0m)) -- not an outstanding performance. That said, BCA and AMM did not fully contribute to the earnings part of the equation this year.

From the above table, it's clear that intangible assets (essentially purchased goodwill and publishing rights) have been the main drag on the company's incremental return on equity. After consistently recording years in the 30%-plus bracket, 1998 saw a sudden decline in Metal Bulletin's reinvestment performance. The deterioration can largely be attributed to the £8m purchase of troublesome publishing business Atalink, an acquisition that has lead to subsequent five-year incremental returns falling into the 17-20% range.

Summary and valuation

Overall, Metal Bulletin remains a robust business for long-term investors. The only concern, as such, has been the recent acquisition activity. However, progress at BCA (by far Metal Bulletin's largest purchase) makes for comforting reading. Integration has been "smooth", with sales for the first two months of the year at "record levels". There's no doubt Metal Bulletin's significant presence in the US pre-BCA (20% of turnover) has had a lot to do with the efficient progress so far

With earnings per share a genuine proxy for free cash flow, the shares (at 220p) currently offer a historic free cash flow yield of 5.2%. If you expect the full benefits of BCA and AMM to boost free cash flow by 7% in 2002, with the remaining operations contributing a flat performance, the shares would offer a prospective free cash flow yield of 5.6%. Using the same assumptions, the shares would have to stand at 164p to offer a free cash flow yield of 7.5%. It's also worth noting that these calculations make no allowance for a deferred consideration relating to BCA, essentially a payment of up to £19.1m to be spread over the next five years.